Economy’s growth momentum accelerating in Japan

BY YUTAKA UDA

Monthly Fund Commentary

21 Dec 2017

BY YUTAKA UDA

​In November, the Japanese stock market recorded a 26-year high following improving economic fundamentals, a continuous upward revision of corporate profits and a strong US market. The Nikkei 225 closed the month at 22,725.0 (up 3.2% MoM), while the TOPIX closed at 1,792.1 (up 1.5% MoM).

Throughout the month, the average daily trading value of the 1st section of the Tokyo Stock Exchange increased to JPY 3.22 trillion, surpassing the JPY 3 trillion level for the first time since May 2013.

The market started the month with solid gains following expectations regarding an expansion of corporate profits for FY2017. One company after the other revised its earnings’ revision upwards. On 7 November, the Nikkei 225 reached its highest level since 9 January 1992. Two days later it then temporarily broke the 23,000 level intraday. Selling pressures later mounted following concerns about high prices and the accelerating pace. The uncertainty surrounding US tax reforms and political risks in the Middle East led to a deterioration of investor sentiment.

However, during the second half of the month, the market was generally solid. After the Nikkei 225 dipped below the psychologically important 22,000 level intraday on 16 November, it rebounded sharply on the view that the correction had already run its course. Towards month end, concerns about a slowdown of the Chinese economy triggered notable sales of semiconductor stocks. However, the Senate Budget Committee’s approval of the tax reform bill and upbeat economic indicators in the US supported US stocks. The Japanese market rallied through to the end of the month, with buying decisions centred around financials.

WTI crude oil closed the month at 57.4 $/bbl from 54.4 $/bbl at the beginning of the month, while the US dollar started the month at 113.6 against the yen, ending at 112.5. In terms of sector performance, 22 out of the TSE 33 sectors gained. The five best performers were oil, retail, marine transportation, mining and air transportation, while the five worst performers were rubber, textiles, fishery & agriculture, non-ferrous metals and utilities. The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 30 November 2017 rose 0.8% compared with that of 31 October, while the TOPIX gained1.5% during the same period. The Fund put no new names into the portfolio with one stock (Daiwa House) sold out.

The Japanese economy’s growth momentum appears to be accelerating, which is expected to remain for the coming couple of quarters. Industrial production rose 0.5% MoM in October, with the government forecasting that industrial production would rise 2.8% MoM in November, followed by a 3.5% increase MoM in December. The Job offers to applicants ratio in October rose to 1.55x, the highest since January 1974. Nationwide CPI (excluding fresh food) continued to rise 0.8% YoY in October, depicting a ten months consecutive MoM increase. Looking at employment data, the number of permanent workers increased by 680,000 YoY, while non-permanent workers increased by only 50,000 YoY. These numbers suggest that corporations are trying to secure their labour force by offering better working conditions in the wake of a serious tightening of the labour market, implying that higher salaries per head will emerge and personal consumption will recover going forward.

Prime Minister Abe is expected to announce a JPY 2.7-2.9 trillion (0.5% of GDP) supplementary budget for FY2017 in December, with the budget being likely to pass in the Diet in January 2018. At present, tax reforms for FY2018 are being discussed between tax committee members and are likely to be decided upon by the end of 2017.

Going forward, the focus will be on corporate taxes. The government aims to double labour productivity growth from 0.9% (the average productivity over five years through to 2015) to 2% in the three years leading up to 2020. In order to achieve this target, the government has plans to reduce the corporate tax burden (currently about 30%) to internationally competitive levels (20- 25%) for companies which actively boost their wage and capital spending. Corporate tax incentives are likely to be given to small companies which increase wages. Mr. Abe is trying to secure a 2% GDP growth for the coming 3 years by utilising all of these policy measures. When new tax reforms will be revealed (most likely to happen in December), the market should respond quite positively.

Apart from geopolitical risks associated with North Korea, the potential for negative events impacting the market appears limited. The banking sector may emerge as a leading engine for a further rally once financial regulations surrounding Basel 3 are finalised, which the Investment Adviser hopes to happen fairly soon.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand due to the increasingly serious labour shortage and potential capacity constraints. Cyclical sectors such as steel, nonferrous metals, and chemical together with energy are also targeted for higher exposure. The Fund retains a positive stance towards banks and trading companies, while defensive sectors such as foods, pharmaceuticals and utilities are avoided. The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 08/12/17 and are based on internal research and modelling

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The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 08/12/17 and are based on internal research and modelling